Does salary exchange show on a payslip?

Usually, yes. The exact layout depends on the payroll system. A payslip may show the lower taxable salary, the salary exchange amount, and the employer pension contribution. Employees should also be able to see what has been paid into their pension.

Can an employee exchange 100% of their salary?

Salary exchange must not reduce cash earnings below the National Minimum Wage or National Living Wage. Employers also need to consider statutory payment rights and benefits, as well as the need for the arrangement to be correctly documented. If you’re using basic pay as the scheme basis, bonuses aren’t included in the calculation. A separate bonus exchange arrangement may allow an employee to exchange some or all of a bonus, but this must be set up correctly before the employee becomes entitled to the bonus. If using qualifying earnings or total pay as the scheme basis, bonuses are already included in the calculation.

Can part-time staff join a salary exchange scheme?

Yes, part-time staff can join, provided the arrangement does not reduce their cash earnings below the NMW/NLW.

Is salary exchange still worth it after April 2029?

In many cases, yes. The first £2,000 of pension salary exchanged each tax year should still retain the NI advantage, and Income Tax relief should remain unaffected. However, employees who exchange more than £2,000 a year will see a smaller NI benefit on the excess. Employers should model the effect before changing their scheme. The answer may differ for lower earners, high earners, and employees making large pension contributions.

Salary Exchange Pensions | Alan Boswell Group

Employer’s guide to salary exchange pensions

Salary exchange pensions remain one of the most efficient ways to help employees build retirement savings. For employers, they can also reduce payroll costs and strengthen an employee benefits package.

This guide explains how salary exchange pensions work, how they compare with other pension contribution methods, and what employers should do now.

Updated: 23.06.26

By Dee Myhill

This content was factually correct when written but may not reflect current developments or information.

What is a salary exchange pension?

A salary exchange pension, also known as salary sacrifice, involves an employee giving up part of their contractual gross salary. In return, the employer pays an equivalent amount into the employee’s pension as an employer contribution.

It is important to set up salary exchange correctly. Salary exchange is not simply a payroll deduction. It requires a properly documented change to the employee’s employment contract, and the employee must agree to the change. HMRC’s salary exchange guidance also makes clear that the employee’s cash earnings must not fall below the National Minimum Wage.

Once the arrangement is in place, the employee’s taxable pay is lower. Under the current rules, this usually means the employee pays less Income Tax and National Insurance. The employer may also pay less employer National Insurance.

When setting up the scheme, employers can choose an arrangement that either results in a higher take-home pay for the employee or higher pension contributions. We’ll look at these examples in this document.

Salary exchange vs relief at source vs net pay

Employers and employees often confuse salary exchange with other ways of paying into a workplace pension. The differences matter because each method affects tax and National Insurance differently.

Method	How it works	Tax position	National Insurance (NI) position
Relief at source	The employee contribution is taken from net pay. The pension provider then claims basic rate tax relief from HMRC.	Basic rate relief is added by the pension provider. Higher and additional rate taxpayers usually need to claim extra relief.	No employee or employer NI saving on the contribution.
Net pay arrangement	The employee contribution is taken from gross pay before Income Tax is calculated.	Tax relief is usually given through payroll at the employee’s marginal rate.	No employee or employer NI saving on the contribution.
Salary exchange	The employee gives up part of their gross salary. The employer pays this as an employer pension contribution instead.	Taxable pay is reduced.	Under current rules, both employee and employer NI may be reduced. From 6th April 2029, the NI exemption will be capped at £2,000 a year.

This is why salary exchange is often the most efficient way to make pension contributions. It can reduce both Income Tax and National Insurance contributions, rather than just providing Income Tax relief.

Relief at Source vs Salary Exchange examples

Below is an example of an employee on a basic salary of £32,000 and a minimum pension contribution of 5%.

Using the relief at source method, 20% tax relief is applied to the pension contribution, resulting in a gross pension contribution of £1,600.

Salary	£32,000.00
Income Tax	£3,886.00
NI	£1,554.40
Pension (NET)	£1,280.00
Pension (Gross)	£1,600.00
Total	£25,279.60

Instead of relief at source, we demonstrate below how salary exchange can increase either an employee’s take-home pay or their pension contributions, depending on the method used. There are savings for both employees and employers on National Insurance. Employees’ savings are either redirected into their take-home pay, or into their pension. Some employers retain the National Insurance savings, or pay some or all of it into the employee’s pension, making the benefit even more valuable.

An example with higher take-home pay

Below is an example of an employee on a basic salary of £32,000, with a minimum pension contribution of 5%, who uses salary exchange to make pension contributions.

The employee National Insurance saving has resulted in the gross pension contribution of £1,600 remaining the same, but an increase to the employee’s take-home pay. The pension contribution has changed to become an employer-only contribution, as tax relief has already been applied within payroll.

Notional Salary	£32,000.00
Exchanged Salary	£30,400.00
Income Tax	£3,566.00
NI	£1,426.40
Pension (NET)	£0.00
Total	£25,407.60

An example with a higher pension contribution

In this example, we are using the same basic salary of £32,000, with a minimum pension contribution of 5%. However, this time the employee’s National Insurance saving has resulted in a higher pension contribution of £1,777.77 (paid by the employer), but with no impact on take-home pay.

Notional Salary	£32,000.00
Exchanged Salary	£30,222.22
Income Tax	£3,530.44
NI	£1,412,18
Pension (NET)	£0.00
Total	£25,279.60

As mentioned above, salary exchange would have also resulted in National Insurance savings for the employer. The employer could choose to pay some or all these savings into the employee’s pension too.

Also, regardless of whether salary exchange applied, there would be an employer pension contribution of at least 3%.

The benefits of salary exchange

Salary exchange can work well for employers and employees. However, its value depends on pay levels, scheme design, payroll capability, and the employee’s circumstances.

Benefits for the employer

The main employer benefit is the National Insurance savings. Under the current rules, most employers pay Class 1 employer National Insurance at 15% once an employee earns above the employer NI threshold.

So, if a member of staff exchanges £2,000 of salary for an employer pension contribution, the employer could save up to £300 in employer National Insurance. The actual saving depends on the employee’s earnings and National Insurance category.

Employers can use these savings in different ways:

Keep it as a payroll cost saving
Pass some or all of it into the employee’s pension
Use it to improve the wider employee benefits package

Benefits for the employee

For employees, salary exchange can mean either higher take-home pay or a larger pension contribution, with no reduction in take-home pay.

Because salary exchange reduces their contractual salary, the employee may pay less Income Tax and employee National Insurance. If the employer passes on some of its NI savings, the employee’s pension pot can receive an extra boost.

The 60% tax trap

Pension contributions (including when made through salary exchange) can be useful for employees whose income is close to, or above, £100,000.

Once adjusted net income rises above £100,000, the personal allowance starts to taper away. Employees lose £1 of personal allowance for every £2 of income above that level. There is no personal allowance when the time-adjusted net income reaches £125,140.

In England, Wales, and Northern Ireland, this can create an effective 60% Income Tax rate on income within that band. Scotland has different Income Tax rates, but the personal allowance taper still applies.

Making contributions to a pension means some higher earners may be able to reduce their adjusted net income and recover part, or all, of their personal allowance. If the contribution is made through salary exchange, the exchanged amount does not form part of the employee’s taxable earnings. If the contribution is made using the relief at source method, the value of the gross contribution needs to be deducted from the employee’s taxable income.

However, this should not be looked at in isolation. Higher earners also need to consider the pension annual allowance, the tapered annual allowance, and their wider retirement plans. Alan Boswell Group's wealth management service can help individuals understand their wider position.

The 2029 changes to salary exchange pensions

In its 2025 Autumn Budget, the government announced a major change to the National Insurance treatment of pension salary exchange. Under the salary exchange reform for pension contributions, the measure will take effect from 6th April 2029.

From that date, the National Insurance exemption for pension contributions made through salary exchange will be capped at £2,000 per employee per tax year.

This means:

The first £2,000 of salary exchanged into a pension should keep the current NI advantage
Amounts above £2,000 will be subject to employee Class 1 National Insurance
Employers will also pay employer Class 1 National Insurance on the excess
Income Tax relief on pension contributions will remain unchanged

The government has stated that further details will follow in secondary legislation.

Why employers should prepare now

Although the change does not take effect until April 2029, employers should not leave planning until the final payroll run before implementation.

A good review should cover:

Payroll software and whether it can track pension salary exchange above the £2,000 cap
Contract wording, especially where salary exchange is built into standard employment terms
Scheme rules and whether contributions are based on reference salary or post-exchange salary
Employee communications, particularly for high earners and employees making large contributions
Cost modelling, including the likely employer NI impact from April 2029
How any shared NI saving arrangements should work before and after the cap

For some employees, salary exchange will remain highly attractive. For others, the NI saving will be smaller.

Salary exchange and auto-enrolment

Employers need to meet their automatic enrolment duties. Salary exchange changes the way pension contributions are structured, but it does not remove the importance of workplace pensions or the need to enrol eligible workers into a qualifying scheme.

In most automatic enrolment schemes, minimum contributions are based on qualifying earnings. From April 2019 onwards, the usual minimum total contribution has been 8%, made up of at least 3% from the employer and 5% from the employee, including tax relief where relevant.

Under salary exchange, the employee contribution is normally replaced by an additional employer contribution. Employers must check that the arrangement continues to meet the scheme rules and auto-enrolment requirements.

Many employers use a notional or reference salary when calculating pension contributions and salary-related benefits. This can help make sure employees are not disadvantaged by the lower post-exchange salary. However, it must be clear in the contract and employee communications.

What are the pitfalls and risks of salary exchange?

Salary exchange can be valuable, but it is not suitable for every employee in every situation. Before offering or changing salary exchange schemes, it's a good idea to consider possible pitfalls and risks.

National Minimum Wage and National Living Wage breaches

A salary exchange arrangement must not reduce an employee’s cash earnings below the National Minimum Wage or National Living Wage.

This point is especially important for lower earners, part-time employees, workers with variable hours and employees who increase their pension contributions. For 2026/27, the National Living Wage for workers aged 21 and over is £12.71 per hour.

Employers should monitor this regularly. It is not enough to simply check eligibility at the time the employee joins the scheme.

Mortgage borrowing and affordability checks

Salary exchange reduces contractual cash salary, and most mortgage offers are based on a multiple of the borrower’s salary.

Many lenders understand salary exchange and may consider reference salary, but employees who plan to apply for a mortgage or remortgage should check before making large changes to their pay.

Salary exchange can affect earnings-related statutory payments, including Statutory Maternity Pay. It can also affect benefits such as death-in-service, income protection, or life cover if those benefits are based on post-exchange salary.

Employers can often avoid this problem by using a pre-exchange reference salary for salary-related benefits. The key point is to make the basis clear in the scheme rules, contracts, and employee communications.

Salary exchange may also affect contribution-based benefits if it reduces the earnings on which National Insurance is paid. This is most likely to matter for employees whose earnings are close to the lower earnings limit.

Should employers use salary exchange for pensions?

For many employers, salary exchange remains a strong option. It can improve pension saving, reduce payroll costs, and make an employee benefits package more attractive.

However, employers need suitable payroll software, clear contracts, robust National Minimum Wage checks, and well-written employee communications.

The 2029 NI cap also means employers should review existing arrangements. The question is not simply whether salary exchange still works; it is whether the current scheme will still work well once the NI exemption is limited to £2,000 a year.

FAQs

Speak to Alan Boswell Group

Salary exchange pensions can be tax-efficient, but they need careful design, clear contracts, and regular payroll checks. The 2029 NI cap makes a review more important, especially for employers with high earners or staff making larger pension contributions.

At Alan Boswell Group, we can help employers review their workplace pension and employee benefits arrangements, including salary exchange. We can assess how the 2029 changes may affect your benefits strategy, help you understand the options available, and support you with regulated workplace pension and employee benefits advice. Where employees need individual guidance, our advisers can also help them understand their own pension and wider financial position.

To find out more, contact the Alan Boswell Group team today on 01603 967967. Our friendly experts would be delighted to help you.

The value of investments and any income from them can go down as well as up and you might not get back the original amount invested. The past is not a guide to the future. The value of tax benefits depends on your individual circumstances. Tax laws can change.

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Employer’s guide to salary exchange pensions

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In this article

What is a salary exchange pension?

Salary exchange vs relief at source vs net pay